The US stock market's third-quarter earnings season is about to hit! But this time, the market won't be "too high"?
The third quarter earnings season for the US stock market is about to begin, with an expected revenue growth of 4.7%, but the growth rate is the lowest since the fourth quarter of 2023. Binky Chadha, Chief Equity Strategist at Deutsche Bank, believes that the market reaction will be moderate, influenced by macro factors such as tensions in the Middle East, the presidential election, and economic prospects. Julian Emanuel of Evercore ISI pointed out that earnings seasons in election years usually do not drive stock market gains. In the past four election cycles, the S&P 500 Index has experienced negative returns in October
Some of the largest banks in the United States will release quarterly earnings on Friday, marking the official start of the third quarter earnings season. Wall Street expects earnings to grow by 4.7%, marking the fifth consecutive quarter of growth since the same period last year, but the slowest year-over-year growth rate since the fourth quarter of 2023.
Given that stocks have risen above normal levels between earnings seasons, Deutsche Bank's Chief Equity Strategist Binky Chadha does not expect the S&P 500 index to see the typical 2% increase in the first four weeks after earnings are announced.
Chadha wrote in a report to clients, "Earnings season is typically favorable for the stock market, but strong rebounds and above-average positions suggest that market reactions will be moderate."
In short, Chadha and other Wall Street strategists are concerned about many other headlines that may continue to attract investor attention over the next month: escalating tensions in the Middle East that could lead to soaring commodity prices; the upcoming presidential election expected to increase market volatility; the current trajectory of the economy, and the significant debate over what this means for the Fed's interest rate cuts.
According to Julian Emanuel of Evercore ISI, all of these factors will "continue to exaggerate macro factors over micro factors in this earnings season."
Emanuel pointed out in a report to clients last Sunday that in election years, earnings seasons typically do not lead to further short-term stock gains. Emanuel stated that in the past four election cycles since 2008, the S&P 500 index has experienced negative returns in October.
Emanuel wrote, "In election years, stocks' reaction to revenue (and earnings per share) results during earnings season is below normal levels, indicating a negative impact of elections on the stock market."
In addition to other risks in the market, certain parts of the bull market narrative have made strategists concerned that investors' expectations for earnings season are too high. Citigroup stock strategist Scott Chronert wrote in a report to clients on Monday that the earnings backdrop entering earnings season has prepared for better-than-expected earnings, with earnings outperforming expectations compared to Wall Street's expectations, and fewer cuts to forecasts than usual.
However, it is important to note that investors have already "bought into the above-average earnings trend".
Nevertheless, strategists believe that this earnings season may present positive catalysts, from which investors can learn. Ohsung Kwon, U.S. and Canada stock strategist at Bank of America Securities, stated that entering earnings season, 72% of companies are expected to see year-over-year earnings growth, the highest proportion since the fourth quarter of 2021, which may indicate "continued breadth improvement".
For Kwon, this earnings season will depend entirely on the outlook provided by companies and the potential impact of Fed rate cuts on their business. Kwon said:
"Now that the interest rate cutting cycle has begun, how will the company comment on any early signs of improvement in a low interest rate environment?"